Predatory Pricing refers to the practice of some dominant firms in selling goods and service at a rate so low that the competitors are likely to phase out of the market if they are unable to compete the lower price. This predation in price also acts as deterrent for potential new competitors to make an entry into the market. Though consumers are benefitted when the price war wages between the predators and their competitors, but when the competitors eventually go out of business, the predators create a monopoly in the market which is not at all beneficial for the consumers in the long run. In the absence of tough competitors, predators gain high revenues by increasing the price of goods and services. Though there are few who argue that predatory pricing is a myth and that a predator cannot rule a market successfully for a long time. Anti-trust laws have been introduced to keep any monopoly created by predatory pricing in check.
The Sherman Act
In order to prevent the corporate monopolies the Sherman Act included under Anti-trust laws was enacted in 1980 prohibiting the attempts at monopolization. Any party guilty of attempting to monopolize a business or trade will be charged with felony. This law also mandated government attorneys and district courts to drag any trust, company or organization, suspected of violation, to the court. The Clayton Act further strengthened the Sherman Act by allowing any person who has incurred losses due to the violation of any activity forbidden in the antitrust laws to sue in the U.S. district court and in case of winning the case, the person will receive triple amount of damages, the cost of suit and reimbursement of the fees paid to the attorneys.
Sherman Act passed restraints on two kinds of trade dealing; one is horizontal agreement and another is vertical agreement. Horizontal agreement refers to the agreement between two companies in competition with each other. This agreement includes clauses relative to the policies of production, distribution and pricing. Price fixing is the most common form of horizontal agreement in practice among business houses which set fixed prices for products to prevent the growth of any competition. Since horizontal agreement is anticompetitive, it is included under anti-trust laws. Vertical agreement, on the other hand, refers to the agreement between businesses at different ladders of the distribution chain. For example, a manufacturer of mobiles phones might get into a vertical agreement with a retailer in which the latter would promote their products in the exchange of lower prices. Though most of the vertical agreements are legal, exception includes the vertical price fixing or the use of resale price maintenance.
According to Sherman Act, competition is beneficial for any market to boom. Monopolization takes place when one firm eliminates competition and wields a monopoly over the market by raising prices at will without fear of any competitor superseding its place. However, acquisition of monopoly through fair means by superior products or skill is not at all unlawful under anti-trust laws. Violation occurs only when one company tries to grab hold of the whole market by removing competitors through predatory practices. Anyone guilty of violation can be prosecuted by the department of justice with hefty fine up to $350,000 slapped on individuals and $10 million on organization for each act of offense.
Charges of Predatory Pricing against Business Giants
Over a period of time, many large business corporations have been brought under charge of anti-trust laws for predatory pricing. Wal-Mart, one of the biggest American retail corporations, was charged for predatory pricing in the year 2000. It was accused of selling butter, milk, vegetable oil and other such staple items below cost with an intention to gain a monopoly in the market by driving small retailers out of business. Crest Foods, a three store supermarket chain filed a suit against Wal-Mart in Oklahoma for predatory pricing intending to force Crest Foods out of its business. The suit complained that Wal-Mart employees often used to pay visit to Crest Foods in order to check its prices and then employed price-cutting in order to hold over the market.
In 1999, the federal government brought charges against American Airlines, one of the major US airlines, for committing felony of predatory pricing to eliminate its competitor Vanguard from business. The government complained in its suit that after the announcement of Vanguard in 1996 as regards its adding service to Dallas-Fort Worth from three cities, American Airlines lowered the air fares and added service on almost all of the routes of Vanguard's operation. Forced by the losses incurred due to the unfair strategy put into place by AA, Vanguard gave up on its expansion plans.
Recently in 2012, the US government slapped charges of price fixing against Apple and five big publishing houses including Hachette SA, HarperCollins, Macmillan, Penguin and Simon & Schuster.
Arguments Offered by McGee and Easterbrook
There are a number of writers including McGee and Easterbrook (OECD, 1989) who argue that there is no guarantee for the predators to earn profits in future after they drive the competitors out of the market. In fact, they believe predatory pricing would prove more harmful for the predators rather than the victims. McGee gives major two reasons for this; 1) even if the company eliminates competition from the market, there is no surety of new competitors not entering the market in future and 2) with predatory pricing, the company often goes for long term contract with the customers and that may reduce the chance of its earning profitability.
According to Easterbrook,(OECD,1989) customers and victim business party both are rational. They will be able to notice what the predator's ultimate intention is. Therefore, the victim businesses will always be able to offer some lucrative packages to the consumers. Easterbrook argues that a predator having presence in multiple markets cannot sustain its predatory pricing in all the markets. Further, predator cannot deter a new business from entering the market by predatory pricing because then both the new entrant and the predator will lose money. But since predator has larger share in the market, it will lose more money than the new entrant. Also in most of the cases even after predatory pricing, the new entrant will enter the market.
Predatory pricing refers to the practice of selling goods and service by few firms at lower price than the competitors with the intention to drive them out of the market. Predators who try to dominate the market by forcing its competitors out of business eventually gain a lot profit by increasing the prices of the goods at will. Anti-trust laws including Sherman Act and Clayton Act have been introduced to restrain any attempts at monopolization. There are several big wig business houses which have been accused of predatory pricing. However, there are a group of writers who believe that predatory is a myth and that in reality, a predator cannot deter new entrants from entering the market nor it can sustain its profitability in the future.
1. OECD 1989, Predatory Pricing, Retrieved from http://www.oecd.org/competition/abuse/2375661.pdf
2. US Legal, Horizontal Agreement Law & Legal Definition, Retrieved from http://definitions.uslegal.com/h/horizontal-agreement/
3. Stacy Mitchell (November 1, 2000), Wal-Mart Charged with Predatory Pricing, Retrieved from, http://www.ilsr.org/walmart-charged-predatory-pricing/
4. Accounting Tools, Predatory Pricing, Retrieved from
5. Antitrustlaws.org, Retrieved from http://www.antitrustlaws.org/Sherman-Antitrust-Law.html